Katharine Grayson of the Minneapolis/St. Paul Business Journal wrote a piece on crowdfunding, featuring SheTaxi founder Peggy Paul. The article appeared in the May 18 print issue:
When Twin Cities entrepreneur Peggy Paul needed $4,600 to build a new website for her startup SheTaxi.com, she didn’t turn to angel investors. Instead, she turned to the crowd.
In January, Paul raised about $3,600 from members of the public via “crowdfunding” website IndieGoGo.com. The money was a “shot in the arm” for the young Bloomington-based business, which has developed a website and coaching services aimed at busy professional women, Paul said.
At the time, Paul could only seek the funding in the form of donations, not equity financing. That’s about to change, though. A new federal law, called the JOBS Act, will allow startups to sell securities to the general public through government-certified online “funding portals.” Previously, companies could only seek such investments from angel investors, venture capitalists or through initial public offerings.
The JOBS Act passed in April. However, the legislation gave the Securities and Exchange Commission 270 days to craft regulations that will govern the crowdfunding process.
For Paul, the changing regulations could present a valuable opportunity to raise funds.
“Right now, it’s appealing to me,” she said, adding that angel investors have been reluctant to invest in SheTaxi because it’s not yet generating revenue. She hopes the general public might be more open to taking a chance on the firm.
Brad Lehrman, an attorney at Minneapolis-based Soffer Charbonnet Law Group who primarily advises startups, said he’s already heard from many Twin Cities entrepreneurs who want to seek equity financing via crowdfunding. The legislation will let companies raise up to $1 million over a 12-month period. (See box for more details on how crowdfunding will work.)
“There has been excitement from my clients who know about it,” he said.
For now, Lerhman’s advice to all of them is the same: “Hold tight, it’s coming.” There’s much left to be sorted out, including how the government will certify funding portals.
Some crowdfunding worries
Also, there are some concerns that the JOBS Act will open doors to fraud schemes. The legislation lets brokers market securities on behalf of startups, and the government will want to ensure those people are acting in good faith, rather than peddling bad deals to unsophisticated investors.
There are other issues, as well. Companies that use crowdfunding could end up with hundreds of shareholders, which may result in complex capital structures that deter venture capitalists from making later investments.
Crowdfunding likely won’t deter angel investors, who don’t view crowdfunding as a threat, said David Russick, managing director of Gopher Angels, an angel-investor network that targets Twin Cities firms.
“I don’t view it as competitive to angel investing in any way at all,” he said. “There are plenty of entrepreneurs and not enough money as it is. It’s not necessarily taking any deals away from us as angel investors.”
Still, some angels will closely watch what terms investors who participate in crowdfunding deals are offered, said Sarah Russick, co-managing director of Gopher Angels.
While entrepreneurs like Paul wait for the opportunity to use crowdfunding, others are planning to launch businesses that will support startups going through the crowdfunding process. Minneapolis-based CommunityLeader Inc., for instance, plans to start a certified funding portal, said Joseph Barisonzi, CEO of the business.
The firm also will advise companies on how to prepare for a crowdfunding campaign. In addition, it will match startups with potential investors. Barisonzi hopes to have 100 companies signed up to use the service by the time the “SEC flips the switch” on the program, he said. The business plans to charge startups about $4,800 for a package of services.
CommunityLeader itself has raised $500,000 from angel investors. Barisonzi, a consultant and former executive director of the Lyndale Neighborhood Association, said startups will have a lot to keep in mind as they pursue crowdfunding.
Even after they raise money, they’ll have to maintain relationships with stockholders, he said. “If you have 200 new shareholders, they’re going to expect communication.”
When it comes to crowdfunding, getting the word out also is a challenge, Paul said. Many people still don’t know what crowdfunding is.
“I think it was a little challenging for people who aren’t living in the online or the entrepreneurial worlds to understand what it was,” she said. “Crowdfunding was a term they never heard.”